refinancing mortgages to reduce payments

[TStoneMBD]

i am a little confused on this subject, and i have been told that this cannot be done even thought it seems obvious that it should be easy to make happen.

say for instance that i purchase a home through a 30 year mortgage and put the manditory down payment down on the home. as i am paying off my mortgage, i will have equity build-up.

isnt it possible to refinance the mortgage yearly without having to pay any refinacing costs? lets say that the house is worth 250k. i make a downpayment of 25k and my equity buildup for each year will be 8k. when i first purchase the house my debt is 225k. after the first year it will become 217k. cant i refinance my mortgage with the bank to reextend my now 29 year mortgage into 30 years at my lowered debt price making my monthly payments much lower? say i want to do this every year, shouldnt i be able to have this automatically be setup with my bank without having to pay costs on the refinance?

being able to invest this way clearly has tremendous advantages. if you want to purchase homes and rent them out, being able to reduce your mortgage over a period of time will allow you to generate positive cash flow. refinancing a mortgage this way doesnt seem to complicated to me and there should be some sort of loan provider that can arrange this.

[Emperor]

There are a WHOLE BOATLOAD of rules regulations that have to be followed when refinancing a home. The biggest reason for all of these rules is so that the paper is saleable on the open market. A very high percentage of loans are sold, very few are held by your bank.
Would an Interest only loan fit what you are trying to do?

Or a line of credit with interest only payments?

I am sure you might get a private lender or a small bank to do what you want, however it is going to cost you upfront to set it up.

[TStoneMBD]

could you explain to me what an interest only loan is precisely? i do understand that loans are sold on a secondary market, but it seems that there should be loan companies out there that can provide these loans even if they charge a slightly higher interest rate.

[DesertCat]

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could you explain to me what an interest only loan is precisely? i do understand that loans are sold on a secondary market, but it seems that there should be loan companies out there that can provide these loans even if they charge a slightly higher interest rate.

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Interest only loans means you only pay interest, no principle, on the loan. IO loans provide you with the lowest possible payment when you first get your loan. The last one I looked at only provided the interest only option for five years, and then the payments shot up. I think it was also an ARM, so the interest rate likely would have gone up.

The problem with the IO loans is that you are counting on appreciation to build equity, since you aren't paying down any principle. The other problem is that people use them to buy homes they probably can't afford. If the IO period ends, and you get stuck with a much higher payment, it could really hurt.

The reason you can't refinance yearly without cost is that the refinancing process isn't cost free, i.e. title insurance, etc. costs money. The people who approve your loans need to get paid. And you will have to pay for everything, one way or another. Be wary of any broker who tells you differently.

I just attempted to refi with a lender that offered an no points loan with only a $895 refi fee. When he sent me docs, my new loan's balance would have been $5k higher than my existing loan, that's where he hid all the other fees (and his commission). Needless to say I didn't take the refinance.

[TStoneMBD]

well lets not call it a refinance then. cant we just call it a complex financing option? i want to go to a bank and tell them that i want them to finance a 30 year loan for me. i want them to extend my mortgage every year to 30 years and reduce the price of payments at a locked in interest rate. if i am provided a locked in interest rate, they could calculate every payment i make to them for the next 30 years and will not need anyone to update my account on a yearly basis. if they cannot give me a locked in interest rate, i am fine with them adjusting my payments every year by extending them to 30 years and changing my interest rate to their new market standard. this should require minimal paperwork for them to keep up with and they dont even need a person to oversee my account every year. a computer could handle this loan.

dont you think there would be investors out there interested in mortgaging property in this way? if this there, shouldnt there be a company that can provide this service to them? if i was a loaning company, i dont see why i would have to charge my clients $895 to refinance their mortgage every year. its not complicated and takes no man-power.

[snowbank]

When you get a mortgage with a bank, the majority of the time the bank will sell that note. So another bank has your mortgage a lot of the time. As far as refinances being free, that doesn't happen. If you had equity in a property and didn't want to go through the refinance process, just take out a HELOC.

As far as trying to get a refinance every year for free; trust me, being a loan officer myself, there is more work involved than you would think. LO's won't work for free. However, there is a creative way to do exactly what you are trying to do. I just heard this the other day. It doesn't involve your equity as much as you would think though, because really, how much equity are you going to pull out each year? Not much unless your area is really appreciating.

I'll give you a hint. Think outside the box. What are you trying to do when you refinance? What is your loan officer trying to do when he works on a loan for you? PM me if you think you can figure it out.

[TStoneMBD]

id guess that when you purchase a second piece of property you can finance your new loan by making both mortgages into 1 payment and have that payment financed over 30 years. at this point in my life i am not interested in purchasing several pieces of property. i am concerned with purchasing a house for myself, so if this is the plan you are talking about it doesnt do me much good.

i was hoping that you would respond to this thread since i know you work in this field. i really dont see the work involved in issuing a loan. it makes sense that reselling the mortgage and approving clients can be complicated, but once you approve me for a loan it seems that making the financing work for me shouldnt be that complicated as long as you make your cut and im paying whoever buys the loan their interest.

i certainly dont know nearly as much about the mortgage business as you do snowbank, but if there is no such thing as an investor that provides this type of financing, then there is a flaw in the system, i am a genius, and i have revolutionized the way the industry should be run.

[DesertCat]

[ QUOTE ]
well lets not call it a refinance then. cant we just call it a complex financing option? i want to go to a bank and tell them that i want them to finance a 30 year loan for me. i want them to extend my mortgage every year to 30 years and reduce the price of payments at a locked in interest rate.

[/ QUOTE ]

If by "locked in" interest rate you mean the same fixed rate as when you first took out the loan, then you are asking the investor to take more than 30 years of fixed interest rate risk. I.e. if they are giving you the optiono of doing this every year, after ten years you effectively have a 40 year loan.

They are going to want a higher interest rate to compensate for this risk (i.e. just like a 40 year loan rates are higher than a 30 year which are higher rate than 20 year which are higher than 15). Since the loan you've described could easily be a 80 year loan, that interest rate premium might be pretty costly.

[imported_bingobazza]

Im not sure how the loans are structured in the US, so maybe this doesnt apply....but Id be surprised if it didnt

In the UK, this cant work in the way you want it to. The reason is pretty simple. When you make a mortgage payment, there are 2 parts to that payment, the interest and the repayment of the original sum borrowed. In the early years, the interest is the bulk of the repayment and the capital repayment is small, simply because there is so much interest to pay....ie..the interest element of your mortgage repayment will never be higher than it is in the first year...BECAUSE you still have so much outstanding capital....therefore you will pay down the capital outstanding at the slowest rate in the first year, but that rate accelerates quickly....if interest rates remain static.

This is becasue of how the repayment curve is set by the lender to allow your repayments (if we ignore special introductory mortgage interest rates) to remain stable throughout the term of the mortgage. What is fluctuating in a very predictable way however the is realtionship between the interest and capital elements of your monthly payments, even thought your monthly payments remain the same if interest rates also stay the same.

So, if you think that you are paying off 1/30 of your capital outstanding each year (in a flat line) during a 30 year mortgage...think again. Its more like 1/70th in the first year, accelerating to 1/10 in the final year...this is a rough guess, but you get the picture.

And fees offset any benefit you get from this strategy until you're about 1/4 - 1/3 through the term of the loan, in my experience...if interest rates are the same. Its a bad idea for other reasons as well.

Bingo

[TStoneMBD]

im a little confused, so youre saying that you dont start building (much?) equity in a home loan until you have been paying it off for many years? i thought equity build worked at a flat rate each year assuming no interest rate change and no appreciation/depreciation of the housing value.

[imported_bingobazza]

Thats precisely what Im saying...equity cannot be built (if interest rates and property prices remain flat) in a straight line as the interest element of your monthly payments fluctuates over the term DUE to equity building...ie...repayment of the initial amount borrowed.

Bingo

[Sniper]

[ QUOTE ]
im a little confused, so youre saying that you dont start building (much?) equity in a home loan until you have been paying it off for many years? i thought equity build worked at a flat rate each year assuming no interest rate change and no appreciation/depreciation of the housing value.

[/ QUOTE ]

Thats correct in the first few years of a 30 year loan, your monthly payments are 99% interest payment.

[Sniper]

[ QUOTE ]
cant i refinance my mortgage with the bank to reextend my now 29 year mortgage into 30 years at my lowered debt price making my monthly payments much lower? say i want to do this every year, shouldnt i be able to have this automatically be setup with my bank without having to pay costs on the refinance?

[/ QUOTE ]

This is a very bad idea.... In the first year of a 30 year loan, you are actually paying more than 99% interest and less than 1% applied to reduce principle.

So, your $300,000 home, would take you over 100+ years to pay off, at a total cost of more than $30+ MILLION.

[Sniper]

I think I was a little sleepy when I did those last posts, as my math is backwards a bit.

The point is that your payments will reduce your principle owed by only roughly 1% in each of the first few years of your loan.

You can do what you suggest by using a short term balloon loan (Ive seen them offered for as short as 3 years) with a refinance option. The problem is that the refinance process is almost the same as you have to go thru to get a mortagage in the first place... meaning you have to reapply to qualify and are subject to many of the same costs. You also would be subject to substantial interest rate risk.

You could also keep your payments low with an Interest Only mortage. In this case non of your payments will ever be applied to reduce your principle.

[snowbank]

im a little confused, so youre saying that you dont start building (much?) equity in a home loan until you have been paying it off for many years?

Almost none. If you want very low payments, put 20% down and get a 1.5% interest 5 year fixed arm. The first 5 years is fixed, then refinance in 5 years before it becomes adjustable.

i thought equity build worked at a flat rate each year assuming no interest rate change and no appreciation/depreciation of the housing value.

Appreciation is the only place you will build equity the first few years unless you make improvements to the property. When I get a chance I'll try and post an ammoritization table on here.

[snowbank]

i really dont see the work involved in issuing a loan. it makes sense that reselling the mortgage and approving clients can be complicated, but once you approve me for a loan it seems that making the financing work for me shouldnt be that complicated as long as you make your cut and im paying whoever buys the loan their interest.

Let's say you wanted to refinance for cash out. We would order an appraisal to make sure the home is worth what you wanted the loan for. We also have to order title to make sure there are no liens against the property. These protect the bank from lending their money. Those are both going to cost you money. We will check your credit report to make sure you pay your bills, because if you don't, the banks may not want to lend you 100% of the value of your home, because that would be a risky investment for them.(575-580 credit scores can get 100% financing by the way) Then we get you approved with the bank that is best for your situation. Once they approve you, we put the file into underwriting. The banks will check the appraisal to make sure there is no fraud(appraisal review). In the meantime, we have to stay on the title companies, appraisers, and banks to make sure they are doing their job. Let's just say they aren't always in a hurry. After it comes out of underwriting they will give us any conditions that we have to meet before they can clear it for closing.(could be verification of employment, different bank statements, etc...) They could come back with several new conditions each day if they want, which is what happened recently with one of my clients. After everything is cleared, underwriting will review everything, and clear it to close. There have been times where I have made and received over 100 phone calls for a client's loan. If it's a clean file and goes through underwriting smoothly and the appraiser and title company both do their jobs to perfection it would be a pretty easy job. All 3 of those things have never happened for me. Lots of times I'm spending my day making sure everyone else moves fast so I keep my client's happy.

So as far as refinancing for free, that's basically why. I could probably get my branch manager to wave the application fee for you. But you will still be paying the appraiser, title company, lender fees. So even if I worked for free, and didn't make any commission and my branch manager didn't charge a fee, there's still a decent amount of expenses. There won't be anyone willing to work for free unless they don't know what they are doing and are working to learn how to do it, or are fudging the numbers until you get to the closing.(does happen in this business, so make sure you go with someone you can trust)

By the way, PM me if you can't figure out the answer from before.(hint: When you refinance, I get paid. You don't unless you have equity. How would you create a scenario where refinancing each year could make you walk away with money, even without equity?) Think outside the box on this one. I just heard this recently while meeting with an investor. Only one guy I have heard of does this, so it's not a simple answer. PM me with a guess, and I'll let you know if you can't get it. Or just IM me: snowbank1515